The devil and the deep blue sea

”On the surface, they can still exercise their iniquitous laws, fight, devour each other, and indulge in all their earthly horrors. But thirty feet below the (sea’s) surface, their power ceases, their influence fades, and their dominion vanishes. Ah, monsieur, to live in the bosom of the sea! There I recognise no master! There I am free!”

– Captain Nemo, in Jules Verne’s 20,000 Leagues Under the Se

Nemo was commander of the Nautilus submarine, the mythical vessel which also featured in Jules Verne’s later novel, The Mysterious Island.

In the wake of the record Centro settlement – struck under cover of budget darkness on Tuesday this week – the chatter in the partnership realms of the big four audit community was how PricewaterhouseCoopers, Centro’s auditor, had blown the caper for everyone.

Indeed, there might even have been consternation on another mysterious island, confided one big time auditor, even within another unfathomable double-hulled vessel with watertight compartments.

So secret is this vessel, said to be docked on a Caribbean isle which only protrudes above sea level at the lowest of tides on a full moon, that it would be improper of your correspondent to confirm or deny that it also might be named Nautilus.

Neither can we confirm that it may have, or may have had, four shareholders, or that it might have held the indemnity insurance for PwC, Ernst & Young, KPMG and Deloitte.

The big four, much of whose vast profits derive from advising people how to avoid paying billions in tax, were firing off press releases like blazes this week, pontificating on every imaginable aspect of the federal budget.

But when it came to fielding one simple and absolutely critical question, their squadrons of communications officers were as silent as the depths of the watery grotto where Nemo himself is interred.

When a client contracts the audit services of Ernst & Young, Deloitte or KPMG, is that client buying the opinion of a blue-chip global audit firm? Or is the audit opinion merely one partner shooting the breeze?

The latter was the case, PwC contended in its defence to the Centro debacle.

Nobody from the big four was prepared to contend otherwise this week. And nobody may know better for quite a while as PwC bit the bullet and agreed to pay $66 million of the $200 million to shut the Centro case down.

Nobody, incidentally, translates as “nemo” in Latin. And it is no accident that this exotic vessel which celebrates Captain Nemo’s legacy hails from faraway, tax-effective climes.

It is also proof that accountants have a wicked sense of humour.

Nemo himself was a man of fine taste and the highest intellect, an innovator who eschewed dry land and believed that the laws of the world no longer applied to him. He detested imperialism too, whose economic manifestation is, of course, tax. And he was an accomplished organist, which seems relevant, but we can’t explain why.

Eschewing for a moment literary licence, the domicile of this entity which may or may not be called Nautilus is Hamilton, Bermuda. So it is actually in the Atlantic, outside the Caribbean Sea.

The point is the same – this fabled vessel and the secret workings of the big four have as much to fear from the scrutiny of Australian authorities as they do from giant squids and maelstroms.

The professional indemnity insurance premiums payable for being a partner of one of the big four used to be $290 a day over a decade ago. You got coverage as long as you, meaning one partnership as opposed to one auditor, stumped up the first $US5 million of each claim. That’s a mighty deductible.

You could double that now, which must put big four partners up there with obstetricians, having to pay hundreds of thousands in insurance before even opening their doors for business.

So there will be a collective hit taken, thanks to a mysterious captive insurance company, but it is the reputational damage to the profession, exacted by the PwC legal debacle, which most irks its rivals.

Like a cabal of World War I generals, the PwC war room shunted its junior officers off to

battle armed with little more than a finger to point. And while their adversaries stood grinning across the trenches, armed to the teeth with bayonets and mustard gas, they were left defenceless, gesticulating at their junior officers and foot-soldiers.

The list goes on. Maybe one day the watchdogs will use their powers under Section 321 to require laggards to lodge. They could even improve the budget surplus by $1100 a pop in penalties.

Finally, JPMorgan merits a quick mention. The too-big-to-failer has admitted the screen jockeys in its London office have toasted $2 billion on the punt.

Thick-skinned as ever, JPMorgan chief Jamie Dimon was still decrying the “Volcker Rule” – that is, the principle of reforming banks to split their trading activities from the rest.

Unless there is change, it won’t matter how many billions JPMorgan blows up, because Dimon and his “hedgers” still get bailed by the taxpayer. So they will continue to take their fancy bets. At the top, risk is dead. And this ”moral hazard” has enfeebled the entire system.

❏ Deloitte responded yesterday to say that the firm takes full responsibility for its audit opinions.

New Michael West Podcast

Created by PodcastOne, this 3 part series looks into how Australia has gone from one of the cheapest countries in the world for energy to one of the most expensive, and reveals just what has happened with our gas and electricity supply and why we are on the verge of an energy crisis.